The Complete CFO Handbook

Chapter 18. Managing Short‐Term Assets

Agenda

Item 1	Identify the factors that a CFO should consider in determining how much to invest in current assets.
Item 2	Explain the reasons for cash forecasting and the reasons for holding cash balances.
Item 3	Describe different cash management techniques.
Item 4	Explain the reasons for holding market securities and the different types of marketable securities.
Item 5	Explain the reasons why a firm extends credit, the different credit and collection policies that can be employed, and the procedures for monitoring accounts receivable.
Item 6	Explain the reasons for holding inventory, the different models of inventory management, and techniques for monitoring inventory management.

As explained in the previous three chapters, managers base decisions about investing in long‐term projects on judgments about future cash flows, the uncertainty of those cash flows, and the opportunity costs of the funds to be invested. In this chapter, we turn to the management of short‐term assets. We will see that such decisions are made in similar ways, but over much shorter time horizons. Thus considerations of risk will take a smaller role in our discussions, while the operating cycle becomes more important.

The operating cycle refers to the time it takes to turn the investment of cash (e.g., buying raw materials) back into cash (e.g., collecting on accounts receivables). The operating cycle in part determines how long it takes for a firm to generate cash from its short‐term ...